Strong jobs report could mean the week ends on an optimistic outlook, after what seemed to be a choppy few days filled with uncertainty. Sentiment data ahead and Fed meets next week.
Jobs report shows impressive growth of 266,000 in November
Market soars ahead of opening bell as investors digest jobs data
No signs yet of jobs data having an impact on Fed’s meeting next week
(Friday Market Open) November turned into an employment bonanza, helped in part by the return of workers from a strike at General Motors (GM). The economy busted out with 266,000 new jobs, the highest total for any month since January.
If you add the Labor Department’s upward revisions of a combined 41,000 jobs for September and October to this impressive November tally, new jobs growth has averaged a very healthy 205,000 the last three months and 180,000 for the year to date. Not too shabby for an economy that many analysts say is in the last stages of a growth phase.
The 266,000 includes close to 50,000 returning GM workers, so keep in mind that it’s not quite as huge as headlines make it appear. Manufacturing employment rose by 54,000 in November following a 43,000 decline in October, which was basically just those workers coming and going from GM. November jobs growth in some other closely watched sectors like construction, wholesale trade, and retail trade was either flat or just a little higher.
However, transportation and warehousing saw decent growth of 16,000 in November, while healthcare led everyone with 45,000 new positions and professional and technical services also came in strong.
If you’re punching a clock, you earned on average of seven cents more for each hour on the job in November compared to October. That puts wage growth at 3.1% year-over-year, right in the heart of the “Goldilocks” zone that gives workers a wallet boost but probably won’t be enough to have the Fed fretting about potential inflation.
Speaking of which, you never want to make too much out of any one data point—and the GM strike caused jobs growth to swell in November. However, a few more reports with this kind of growth could have people talking about whether prices see an impact. That said, the Fed has openly invited a bit more inflation because inflation remains below its 2% target. So a report like this and even a few similar ones early next year wouldn’t seem likely to send Fed members rushing back to the rate hike button.
What’s also interesting about today’s big number is that it goes against some talk on the Street about businesses possibly scaling back their hiring due to the trade war. That’s still possible, but it didn’t appear to happen in November. Maybe positive talk about a possible Phase One trade deal caused businesses to loosen the reins a bit.
This economy continues to be resilient, and consumer health could improve even more when you consider this sort of employment gain. The unemployment rate of 3.5% remains at 50-year lows. As we’ve said before, jobs help dictate spending, and consumer spending fires up the economy. That’s why some of the extremely low Q4 gross domestic product (GDP) estimates out there might start to get revised upward a bit following this report.
The market apparently liked what it saw from the Labor Department, with futures climbing sharply for the major indices in the hour before the opening bell. We’ll see if this can help the S&P 500 Index (SPX) climb back toward its all-time high up above 3150 after the retreat it executed over the last week.
Two of the better performers Thursday were Chinese retailers Alibaba (BABA) and JD.com (JD). Both had pretty amazing Black Fridays, and it might be hard to guess the best-selling product for them that day. Give up? Baby formula, of all things. Sales rose 172% from last year for that essential item, which is kind of a surprise.
The other surprise is to see that two Chinese firms, who you’d think might suffer from the tariff war, seemed to thrive once holiday season arrived. Both did well with U.S. consumers on Black Friday, and BABA shares are near their 52-week high. From a sales and stock perspective, these companies’ recent performance might counter conventional wisdom arguing that a trade war could hurt retailers of the two countries involved.
That said, Tiffany (TIF) reported earnings more along the lines of what you might have expected in a tariff struggle, with sales slumping in the U.S. as it looked like Chinese tourism might have fallen. The company’s flagship store in New York often gets a lot of Chinese visitors, but not so much this year, it seems.
It’s a bit of a conundrum, though, seeing the U.S.-based company do pretty well in China. It’s not looking like high-rolling consumers there gave it the fish-eye. The same could be said for U.S. consumers shopping online at BABA and JD. Maybe the two countries’ leaders are having a battle, but the troops on the ground don’t seem to be taking up weapons, at least not judging from the recent shopping season.
Stepping back a bit, JD and BABA’s performance reinforces the idea that the consumer continues to spend, spend, spend. We’ve talked about it since early October, so it may sound like a broken record, but this consumer resilience is just amazing. Early indications are that the holiday season is off to a good start.
With the Fed meeting looming next week, it’s not too early to start thinking about outcomes. At this point, chances for a rate cut look about as likely as a snowstorm in Miami, if the futures market is any indication. The CME Group’s (CME) FedWatch Tool puts 99.3% odds on no rate move next Wednesday, and 0.7% chances of a 25-basis point hike. Apparently a handful of investors think the Fed is more hawkish than the rest of the market appears to believe.
Today's robust jobs report would seem to bolster the "leaning hawkish" argument, although the middle-of-the-road wage gains don't appear to be in the inflationary range just yet. Yields rose about 5 basis points for the 10-year Treasury note in the minutes after the data, but the FedWatch hasn’t changed.
Next week’s meeting and post-meeting press conference could give more insight into the Fed’s thinking one final time before 2020, and it also will include an updated “dot plot” showing where Fed officials see rates headed over the next few years. We’ll discuss that more next week.
Thursday wasn’t much of a day for the stock market, with major indices chopping around ahead of the jobs report. Something to keep in mind for the next jobs report in early January is that the day before is getting to be a little like the day before a Fed meeting, with few people wanting to get too long or short ahead of the news. The SPX started Friday just about 1% below its all-time high set last month. Bonds, gold, and volatility barely moved on Thursday, and all seem relatively range-bound with the exception of that sharp and short-lived bounce in the Cboe Volatility Index (VIX) earlier this week.
On the data side, factory orders for October came in a bit better than analysts had expected and the September data were revised slightly upward, which isn’t a bad thing. University of Michigan sentiment is ahead later this morning.
Crude was also pretty steady Thursday despite headlines about OPEC agreeing to make deeper-than-expected output cuts of 500,000 barrels a day above and beyond the 1.2 million barrels a day already being held back from production. That news didn’t appear to help the Energy sector much, as it had by far the worst day of any S&P 500 sector and remains the weakest sector performer this year.
One reason Energy stocks and crude didn’t get a boost could be an idea that OPEC’s extra production cut might not make up for the anticipated output gains from the U.S., Norway, and Brazil seen coming online in 2020.
Also, industry data suggest OPEC is already producing about 500,000 barrels a day less than the previous agreement allowed, meaning any addition to the output chop would be an addition in name only and perhaps have limited market impact, trade media reported. The new OPEC deal expires at the end of March, around the time when new supplies from non-OPEC producers could be hitting the market. That might put OPEC under increased pressure to cut further or face a plunge in crude prices, though forecasting where crude might go nearly four months ahead of time doesn’t typically pan out.
CHART OF THE DAY: TRANSPORTS OUTRUN: The transport sector ($DJT-candlestick), sometimes seen as a barometer for the broader economy, hasn’t been able to keep up with the Dow Jones Industrial Average ($DJT-purple line) over the last three months. Data Source: S&P Dow Jones Indices. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Looking Forward to Monday? It’s just 359 days until Black Friday (remember 2020 is a leap year with one extra day), but here’s something to consider filing away for next time. Black Friday once was the biggest shopping day of the year, but it looks like Cyber Monday is “upstaging” its more traditional cousin, the Chicago Tribune reported this week. For the first time, the majority of U.S. consumers (54%) said ahead of Black Friday that they’d do most of their holiday shopping online, according to consulting giant PwC. This might actually be good for retailers, who typically put their Black Friday plans into place long before the actual calendar day.
With online shopping, experts told the Tribune, retailers can be more nimble, watching real-time reactions from customers and adjusting accordingly. They can quickly change prices or introduce flash sales hour-by-hour, depending on how consumers are shopping. Some companies even set up “war rooms” where they can monitor and react to sales data as it comes in. As for those Black Friday car trips to the big box? They’re starting to sound a bit old fashioned to some. An estimated 36% of consumers planned to shop the day after Thanksgiving this year, down from 51% in 2016, according to PwC.
Optimist’s Club: While the focus later this morning could turn to monthly consumer sentiment data, there’s another type of sentiment that sometimes gets overlooked: The investor type. Taking in the atmosphere among investors at the moment, it doesn’t feel like the three-day skid from Friday through Tuesday really did much damage to the optimism that’s prevailed on Wall Street in recent weeks. What might have happened is a little end of month profit-taking and consolidation around recent gains, which arguably could put the market in better shape to build on the rally now that some of the weak longs have perhaps been flushed out. The other side of the narrative argues that the 10% rally over the last two months meant Santa Claus came early this year, leaving less chance for a “Santa Claus” rally at its traditional time late in December.
Tail Wagging the Dog? In recent history, the U.S. dollar has typically had some influence on the crude oil market. Dollar strength often weighs on crude because crude is priced in U.S. dollars and a strong dollar makes crude more expensive for overseas buyers, sometimes depressing demand. This time around, however, a rally in crude appears to be pressing the dollar down. Crude climbed from recent lows of around $55 a barrel for U.S. product to above $58 by Thursday as investors anticipated a sharper production cutback from OPEC than originally expected. The hike in crude prices over the last few days corresponds with a slight period of weakness in the dollar index, which fell from highs above 98 last week down to around 97.40 by Thursday. It’s easy to confuse correlation with causation and it’s often tough to see which market is influencing the other, but in this case, it does appear that stronger crude prices might be pushing the dollar lower.
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